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The true value of strategic succession planning for families in business

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Taken together, some of the statistics from a recent Family Business Survey are particularly enlightening.

The survey found that the overwhelming majority of family firms (85%) intend to remain family-owned. Yet while almost half (46%) are worried about the long-term sustainability of their company, only 38% have a succession plan in place.

For family businesses, long-term success is especially dependent on effective succession planning. Yet it’s hard to get right – and that’s precisely because they’re family-owned. It gets complicated by the personalities, relationships and emotions of the people involved.

That’s why it has the potential to go devastatingly wrong.

In one case I know of, a well-meaning father divided his business between his two children, without discussing their own aspirations with them. One sibling had no interest in being part of the firm, and simply wanted to cash out. The result was a bitter lawsuit, causing untold damage to the family dynamic.

A strategic approach

Charlotte at the 2019 Family Business of the Year Awards

While participating in the judging process for the 2019 Family Business of the Year Awards, it was clear to me that successful firms approach succession strategically.

Family Business of the Year Awards 2019

They put a professional decision-making process in place, often with the help of specialist family business advisers (FBAs). This replaces emotions and knee-jerk reactions with logical and rational long-term business planning.

The task of strategic succession planning should begin with an objective information-gathering exercise. At Goodman Jones, we do this by speaking to all family members, whether they work in the business or not, as well as major stakeholders from outside the family (such as company directors, senior managers, advisers or shareholders).

This helps to achieve several crucial outcomes:

• It gives everyone concerned a safe space to express their ambitions and desires for the business, the family and themselves.

• It promotes an open discussion between family members about their visions of the future – which can lead to new ideas and opportunities, such as offering complementary services.

• It allows us to test and – if necessary – challenge any assumptions from family members about what others might want.

• It reveals any differences between the aims of the different generations involved.

• It provides a base from which to seek any compromises that may be required, and establish a plan that everyone’s happy with.

• It identifies any skills gaps in younger family members who intend to take a role in the business, so that training can be arranged well in advance.

Then once the plan for the future is agreed, we can support the business and the family with tax planning, advice on transactions and/or exit, and training and development for the next generation. And we’ll work with the family to regularly revisit the plan, and update it as needed.

More than a business plan

However, the real value of strategic succession planning goes far beyond such practicalities. Many of our family business clients tell us that they get much more from the process than a robust plan.

They often find that the strategic and commercial vision for the business is more unified, and more coherently defined. And they come away with improved and more open relationships; certainty over the future; and confidence that they’ve made the right decisions for the business and their family.

It’s never too soon to plan for the future. Not to mention for the unexpected: illness, death, and life-stage changes such as the birth of children can suddenly change the equilibrium of a family firm.

So think about investing in the long term now; there really is nothing more important for your business and your family.

When succession is a challenge

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But for all your careful thought and preparation, things don’t always go as intended.

In our long experience of helping family businesses with succession, there are two situations that can go awry. You may decide that only some of your offspring should be involved in running the business – or potentially, none at all.

Some in, some out

If some of your children are to take over, and others aren’t, how do you make sure they all benefit from the family wealth? And how do you find an arrangement that everyone is satisfied with?

This demands some delicate management. The key is to understand what works for each family member – and of course for the business.

To state the obvious, it generally goes one of two ways: dispute, or agreement (invariably with a degree of compromise).

Dispute

Problems can arise when owners singlehandedly decide to divide the business up between all of their children. It’s quite common to discover that those not involved in the firm aren’t interested in share ownership.

Though well intentioned, share ownership doesn’t always suit those who won’t be involved in the firm. They may prefer to ‘cash out’ straight away.

This can lead to disputes over the value of the shares they’re being given. The result may be a protracted and costly litigation, which requires the new owner(s) to raise funds and buy their siblings out.

It sounds drastic, but we’ve seen this happen when due care and attention aren’t given to the succession process. Such cases can be distressing, as they put severe pressure on family relationships.

Having a skilled family business adviser can help with the stresses and strains of what is undoubtedly a difficult process. We can not only help firms to raise and structure funding; we’ll also act as a personal mentor, and an impartial mediator between family stakeholders, to help reach an agreement everyone’s comfortable with.

Agreement

If not everybody wants share ownership, the answer may be to give this to those who take over; and bequeath other assets – your house, for example – to their siblings.
Once an arrangement has been found, you’ll need an expert to take you through the business valuation process; and the statutory process of transferring share ownership. You should also seek advice on the capital gains , inheritance and other tax implications for all concerned.

All out

The result of your succession planning may be that none of your children are capable of, or interested in, taking over the business.

In this case, there are two routes open to you: sell the company, or retain ownership and make an external appointment.

Sale

Selling the firm may involve a management buyout (MBO) or an external third party.

If external, there may be scope for some or all of the management team to stay on, for the short term or permanently.

Whatever the arrangement, think about whether you want to remain in the business for a transition period. Some buyers may prefer this arrangement.

Selling will mean getting a valuation of the business, and appointing an agent to find a buyer. We can run the sales process for you and optimise your post-sale tax position. You might also need a bit of moral support: seeing the business leave the family can be an emotional time.

Appointment

Retiring from the business won’t necessarily mean giving up ownership. You could appoint someone from outside of the family to run it for you.

Again, this can prove an emotional wrench. It can be difficult for family business owners to give up control of something they’ve spent years building, and which may have been in the family for several generations.

Then there’s the performance risk that comes with somebody running the firm who doesn’t know it like you do (and lacks the same emotional investment). You might want to incentivise external appointees with a percentage of the proceeds from a future sale. Again, this needs careful implementation and specialist tax advice.

Be objective

Succession is partly a business decision. But it’s also a people decision: a decision about not just abilities, but also ambitions and personal relationships.

Crucially, it must be an objective decision. Yet taking an impartial view of your children’s capabilities and drive won’t be easy. At the same time, you mustn’t encourage someone to take over without the vision to ensure your business thrives under their leadership. And you mustn’t assume that all of your sons and daughters will want ownership.

Whatever your succession strategy, the need to start the process early can’t be overstated. It takes time to groom the next generation, or to find external appointees who are right for your business.

Getting succession right is vital for the future of your business and your family. Don’t put yourself under pressure to make decisions in a hurry, or leave yourself with no option but to sell under duress.

To discuss how Goodman Jones can help you to plan for succession at your family business, contact us.

This is part three of a series of blogs on family business succession. You can read the first two instalments here.

Nurturing the next generation in a family business

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Running a family business isn’t only about making money. The owners of course want to maintain and grow the family wealth; but they often want to build a business that can be passed on to future generations. Portrait of multigenerational winery owner family standing at wine cellar. Senior winemaker and young sommelier standing at background and holding in hands a glass of red wine while middle age businesswoman looking at camera and smiling. Small business.

This can be easier said than done, however. According to the Family Firm Institute, less than a third of family businesses survive into the second generation. Just 12% make it to the third, and just 3% reach the fourth generation or beyond.

As the saying goes, ‘the first generation builds the business, the second makes it a success, and the third wrecks it’.

Succession planning

Effective succession planning is crucial to the longevity of a family business. But it can also be one of the most highly charged issues for owners to deal with.

And the impact can be devastating when it goes wrong. There’s the potential for litigation, huge legal bills, and critically, a breakdown in family relationships.

At Goodman Jones, we’ve supported many family businesses through the succession process, and know what works – and what doesn’t.

Making the hard decisions

Which of your sons and daughters are capable of taking over the business – all of them, one in particular, or none at all? It’s one of the most difficult questions a family business owner can face.

It takes strength and focus, but you must base your succession strategy solely on appointing the best person (or people) for the job. Whatever your decision, it must be right for the business.

That may sound impersonal, but remember: what’s best for the company will also be best for your family in the long term.

So how do you go about choosing the most suitable successor(s)? In our experience, it pays to keep the following in mind:

• Look forward. What skills and aptitudes are required to run your business – and what will be needed in the future?
• Think about soft skills. As well the ability to run and develop the business, your successor must have the appetite to do so. Look for vision, passion and work ethic.

• Be impartial. Having identified the necessary capabilities, draw up a job spec, and evaluate your ‘candidates’ objectively. Get an external perspective to help with this.

• Have realistic expectations: Does your chosen successor have all of the skills for the job? If not, can they be developed?

If you conclude that one or more family members shouldn’t take over the business, there are other ways to support the next generation. Our next blog will look at this in more detail.

Preparing for succession

Being in charge of the business may be second nature to you, but it will be new to your successor. There will be much to learn. So it’s vital that you begin planning the transition some years in advance.

With enough time, you can create a structured training and mentoring programme, to help the next generation acquire the skills to make the business a success.

This should involve exposing them to all aspects of the firms’ operations, in order to instil an in-depth understanding of the business before they take the reins.

At the same time, however, restricting their business experience to the family firm alone can be limiting – unless it’s a larger company, with several senior managers to learn from. Stints working at other firms will provide a different perspective on managing a business, and may prompt fresh ideas that may help strengthen your own operation.

The success of your transition planning will play a huge part in determining whether your sons or daughters will maintain the success of the business you’ve worked so hard to build – and pass the legacy on to your grandchildren.
If these issues sound familiar, and you’d like to discuss succession planning for your family business, please contact Larry Phillips.

This is the first in a series of blogs on family business succession. If you’d like to know when future instalments go live, please sign up for updates.

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